The Malta Independent 22 July 2024, Monday
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Different shades of our economy: going underground

Mark Said Sunday, 28 May 2023, 07:26 Last update: about 2 years ago

The Maltese economy has long been tainted with the interchangeable characteristics of either the black or grey economy, or even a shadowy one; call it what you will, but each one of them operates under the veil of clandestinity. The fact remains that, to a very large extent, much income is generated by undeclared work or other undetected illegal activities. Depending on circumstances and, of course, the nature of the activity, this little-known and wide-ranging sector of our economy can be a boon or a curse for our country.

Naturally, we are here going underground, but it is important to fully understand the relationship between the underground economy and the illegal economy. Illegal economic activities are government-restricted activities that are seen by society as harmful and immoral. Drug trafficking, usury, and prostitution are classical examples. Naturally, activities that are forbidden to run as registered economic activities are unregistered activities as well. Thus, the undergrounding of some economic activities for various reasons causes the undergrounding of taxable resources. Earned money from such illegal economic activities is referred to as "black money", and the legalisation of this money takes on the veil of "money laundering".

The underground and illegal economies differ radically in the roles they play in our society. The illegal economy comprises criminals who are committing acts of bribery, fraud, and racketeering and willfully inflicting wrongs on society. On the other hand, the underground economy involves otherwise law-abiding citizens who are seeking refuge from what they perceive as draconian measures inflicted on them by the government. They are employers and employees who are rendering valuable services without a licence or failing to report their productive activities to the competent official authorities. It involves an economic activity that, in normal circumstances, would be perfectly legal but that yields income that is not reported to the tax authorities.

Maltese legislation does not define undeclared work. Government documents (such as the National Reform Programme 2013) that occasionally mention the term do not provide a definition. On other occasions, wider terms such as black economy, shadow economy, and grey economy are used instead of undeclared work. Since no legal definition of undeclared work exists, each organisation in Malta with an interest in undeclared work tackles the issue according to its remit. Our national authorities supposedly responsible for addressing undeclared work are the Department of Industrial and Employment Relations (DIER), JobsPlus, the Ministry for Family and Social Solidarity (MFSS), through its Benefit Fraud and Investigation Department (BFID), the Tax Compliance Unit (TCU), and, of course, the Malta Police.

Although Malta holds no national data on workers in the informal economy in terms of size, activities, hours of work, or trends, involvement in undeclared work is not necessarily low. A large percentage of Maltese are exposed to the black market economy. Partially undeclared self-employment is among the most prominent types of undeclared work. Nearly a fourth of the Maltese (23%) are estimated to have purchased goods or services that may have included undeclared work from firms or businesses. Migrants, particularly those from sub-Saharan Africa residing in open centres, are prone to engage in exploitative undeclared employment. Seasonal or part-time employment also attracts a significant number of students to undeclared work, and a proportion of formally inactive women also do undeclared work. A declining number of people registering as unemployed engage in undeclared work while claiming unemployment benefits.

The main sectors that appear to attract undeclared work are tourism, services (such as health care and private tuition), sales, and construction. Construction appears to attract illegal immigrants and people registering for employment. Young people often do undeclared work in the tourism sector. Formally inactive women often engage in household services (e.g., cleaning) and contribute to family businesses. Undeclared work appears to be more common among small local employers than larger international companies. The lack of control by authorities can be considered a prime motivating factor. Such a lack of enforcement promotes a trade-off between employer and employee, in which the employee settles for an hourly wage rate below that provided by law in return for avoiding national insurance contributions and income tax. Customers may also buy undeclared goods and services because they are cheaper.

Some advantages of the underground economy include bringing competitive power to the economy, increasing employment, having a multiplying effect on the economy, providing resources to the official economy, bringing dynamism to the economy, and being the assurance of a socio-economic system. On the other hand, the underground economy has various negative effects on the economy. The growth of the underground economy means shrinkage in the official economy, which causes tax losses.

The other negative effect on the economy is related to competition. The underground firms pay no tax, or less tax, than the other firms, so they gain competitive power, and it will be unfair competition. Furthermore, an underground economy causes unreliable statistical data. In that case, it would be impossible to determine the size of the economy and its distribution. Once they cannot be determined properly, economic policy decisions cannot be made either.

The underground economy is a very important phenomenon. Needless to say, struggling with an underground economy is the most important job of the government. Over the years, we have had several government measures to offset the negative consequences of this unavoidable problem. Debureaucratization and simplification of our tax system with tax reform, establishing an effective auditing system with tax administration reform, and more frequent tax audits and heavier penalties for tax evasion were the most effective.

With the vast developments in information and communication technology, it is not impossible to control the underground economy. The main barrier to tackling undeclared work in our country has always been the lack of effective enforcement, mostly due to a disjointed inspectorate and enforcement regime and a lack of resources. That aside, fewer government restrictions on economic activity for particular goods and services should further minimise both the underground and illegal economies that still pervade our nation.



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